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Thursday, December 21, 2006

Sunterra Update

Following the recent press release and conference call I asked Al Bentley if he could clarify a few points for us as Club Sunterra Members rather than Shareholders. Al has kindly put the following together for us.

I wanted to follow up with you regarding the recent press release that was issued by Sunterra Corporation insofar as it relates to the operations of Sunterra Europe (Sunterra Corporation and Sunterra Europe are collectively referred to as the “Company”). As a public company we follow the guidance issued by the SEC in regards to what information that must be provided and the timing of when such disclosures are to be made. The press release has been made public and a conference call was held by the Company with the analyst that follows the Company’s stock.The press release addressed the following topics:

The Company has completed the fact finding portion of the independent investigation made by the former employee. The investigation determined that the Company did not maintain effective control over its financial reporting because of significant weaknesses in its internal controls in Sunterra Europe.

These issues do not relate to the resort operations, member relationships, or any financial or other transactions dealing with the members. There have been no allegations or evidence that there have been any financial improprieties that involve member sales, payment of management fees, or use of management fees. In other words, there are absolutely no suggestions that the member’s money has been used inappropriately or that members have been mistreated or mismanaged.

The financial reporting issues referred to above relate to the Company’s reporting of its results of operations and financial position to the Company’s public shareholders. The issues primarily relate to the amount, timing, and recordation of various accruals in the Company’s financial statements

To re-establish reliability and accuracy in its financial reporting, the Audit Committee and management have developed a remedial plan intended to prevent recurrence of inappropriate conduct and to strengthen and improve the control environment, permitting Sunterra’ financial statements to be fairly presented under U.S. Generally Accepted Accounting Principles (US GAAP).

A remedial plan has been developed. The remedial plan includes:

i. Training for all of our employees on a global basis emphasizing compliance with laws, regulations, and financial reporting requirements.

ii. The executive management of the Company has been changed. The corporate culture in place is one of strict compliance.

iii. Certain employees in the Company’s offices in Europe, primarily in the accounts department, have been placed on administrative leave and their continued involvement with the Company is being evaluated. This does not impact on the Company’s obligations and performance of its obligations under the management agreements. The Company has engaged outside professionals to assist the Company during this process to ensure timely and accurate financial reporting.

iv. The Company continues to employee external professionals in Senior Management positions until new management has been retained.

v. The company has engaged an external, independent accounting firm to review its internal control compliance on a global basis.

vi. Additional internal controls are being adopted throughout the organization. European issues – Restatement and Management Review

The Company has made voluntary payments in Spain relating to the under withholding of certain employment related taxes.

The Company has engaged a team of professionals to review its tax compliance throughout Europe. These professionals, together with management, have determined that additional tax obligations may exist. The Company will be working with these professionals to quantify these payments and record the necessary adjustments in the Company’s financial statements. None of these tax issues relate to the members including any overcharges to members, etc. These are strictly the Company’s issues and not those of the Clubs.

The Company will restate its historical financial statements to reflect these tax adjustments as well as any other changes that may be necessary.

The operational review in Europe highlighted a number of issues generally confined to compliance, deferred maintenance, and resort licensing. Remediation of the compliance issues is underway and involves the expenditure of approximately $1.8 million to ensure that the resorts are compliant with all laws and regulations.

As a result of the Board decision to put Sunterra Europe of for sale, the Company is required to account for this business segment as a discontinued operation in the Company’s fiscal 2006 financial statements. The expected additional tax-related obligations, the remedial costs associated with the European operational review, and the discontinued operations assessment has led the Company to conclude that its investment in Sunterra Europe will be substantially impaired.

Accounting for Sunterra Europe as discontinued operation is an accounting term used under US GAAP. It basically means that the Company will segregate its statement of operations from those that are continuing (the US Operation) and the discontinued operations (Sunterra Europe). Discontinued operation is purely an accounting convention. There is no impact on the resort. The resort operations are not being discontinued. There is absolutely no impact on the member’s use of the property, ability to book reservations, ability to book travel etc. It is just is how we will report our results to the public.

Sunterra has concluded that its investment in Sunterra Europe will be substantially impaired means that the sale of Sunterra Europe may not be high enough to repay Sunterra Corporation for the entire value of its stock in Sunterra Europe and the amount that it has loaned to Sunterra Europe. Impairment means that Sunterra Corporation may take a loss on the sale of Sunterra Europe. Again, while this impacts our shareholders, it has no impact on the Club membership.

Subsequent to the investor call, the Company’s stock increased by approximately 10%.

Update regarding auditors

In a subsequent 8k filing the Company has announced that they have engaged BDO Siedman to be its external auditors. Accordingly, we are moving forward in getting our financial statements audited and our registrations with the SEC.

2 comments:

It seems remarkable to me that the European operation did not comply with UKGAAP accounting procedures. Even though they were reporting to USA.One could be excused in believeing there was some very shoddy management of the accounts biut it surely eminates from the USA.Looks to me like someone is passing the buck or is there some other bad news to be made public in the wake of this accounting anomaly?